Business Financing

Through Paycheck Protection Program (PPP) lending, we’ve seen a significant increase in businesses using Certified Public Accountants (CPAs) or other third-party accountants to help them prepare calculations and supporting documents for a PPP loan and the resulting forgiveness applications. The involvement of accountants has sped up loan processing/origination by decreasing requests for information or supporting documents. Many accountants have gone a step further, helping small business owners manage their loan proceeds and ensuring that they come out of this crisis stronger than ever.

The best accountants do much more than handle your bookkeeping and talk to the IRS on your behalf. They use their financial perspective to offer both a narrow-focus and 50,000-foot view of your company.

When it comes to securing business financing, the right accountant will factor in what you need and what the lender wants to see. PPP loans are backed by the Small Business Administration (SBA), removing traditional considerations from the lending process, but your attractiveness to lenders is essential in most business lending scenarios. Taking your relationship with your accountant beyond taxes and into the realm of business financing is a smart step that a lot of business owners are now starting to wake up to.

Accountants Know What Lenders Look for From Small Business Owners

Most lenders use similar methodologies to determine the creditworthiness of borrowers. Mastering the 5 Cs of credit – character, capacity, capital, collateral, and conditions – gives you the best chance of satisfying their framework. Here’s what goes into each C:

1. Character

Lenders determine character by looking at your credit history, references, and presentability. Many have a minimum credit score for different loans. They could choose to do background checks and investigate your personal and professional history.

There isn’t much you can do to improve your credit score if you need business financing immediately, but an accountant can give you tips to increase it if you have time. What an accountant can quickly make a difference with is presentability, using their experience to help you convey the right intangibles and structure your applications in the best possible light.

2. Capacity

The most important thing to lenders is getting their money back. One of the best ways to assess the chances of that happening is to look at capacity – or the ability to cover your debts with your cash flows. This is typically quantified through the debt-to-income ratio – you’ll want yours to be 36% or less.

Not all cash flows and income are created equal though. If your cash flows are volatile, for example, lenders could insist on a higher debt-to-income ratio. Talking with an accountant can help you understand your current business’ health with regard to cash flow and enable you to identify your strengths and weaknesses. Then, you can plan accordingly when applying for a loan.

3. Capital

Lenders care about how much money you’ve invested in your business. If you have some skin in the game, the thinking goes, you’re less likely to default on your loan.

Seventy-eight percent of startups are self-funded in their first year of operations, so, chances are you have at least some equity in your company. But even if you don’t, it’s not a death knell. You might want to turn to a Certified Public Accountant to help you frame your situation to lenders though.

4. Collateral

You can seek an unsecured loan, but you’re going to end up getting less favorable terms to compensate the lender for the additional risk. If you are willing to put up collateral, however, you can get a secured loan and better terms.

Collateral can be business assets such as inventory or equipment. Or it can be a personal asset such as your home. Obviously, you want to tread carefully when it comes to risking any of your personal assets.

The right business structure can ensure that your risk is well-defined. An accountant can help you weigh the consequences of decisions like sole proprietorship vs. LLC and set up your legal structure.

5. Conditions

Are your revenues growing or shrinking? What do you plan to use your loan proceeds for? Do you have a business plan? Lenders want to see stable or growing cash flow projections and have confidence that the funds will be used wisely.

On top of that, the state of your industry will impact lending decisions. If a lender is providing long-term financing and your industry landscape looks uncertain, the chances of repayment are lower.

You can’t control all of these factors, but you can try to apply for financing when conditions are favorable. If that’s not possible, you’re not necessarily out of luck, but you may have to pay a higher interest rate or include collateral. Whatever the case may be, an accountant can help you review your options.

A CPA Can Help You Determine Eligibility

Getting qualified for a business loan can sometimes go beyond just the 5 Cs of credit. Take the Paycheck Protection Program (PPP) for instance. PPP has had a net positive effect on small business owners, but it has exposed a problem that has been lurking for a long time; navigating loan eligibility requirements can be very challenging. The SBA changed a key word in the PPP application four weeks after the initial applications were accepted, which scared some business owners into unnecessarily paying back their loans.

That wasn’t the only change to PPP eligibility requirements though. The goalposts on loan forgiveness were shifted and the second round of PPP lowered the employee cap and loan maximum.

Keeping up to date on the PPP eligibility requirements started to feel like a part-time job and that’s just one program. Business owners have a large number of business financing options they can choose from. So how to stay on top of all these requirements? A CPA can educate you about the loan program landscape, keep track of changing eligibility requirements, and help you make the right choice – whether about what product to choose, how much money to take, or when to consider other alternatives altogether.

How CPAs Help You Choose the Right Loan Amount

The Paycheck Protection Program allowed small business owners to borrow money at 1% and the loan is forgivable under certain circumstances. For this program, it made sense for business owners to borrow more aggressively and take the maximum loan amount available.

But what if your business couldn’t receive additional PPP funding, or you needed funding for a different purpose other than the very specific set of expenses allowed with PPP loan proceeds?

In cases like these, and in most financing decisions for your business, you should start by carefully considering the amount you want to borrow. An accountant can help you come up with a number by balancing your business needs with the risk that comes with taking on more debt. CPA firms are specially trained at providing businesses with a clear picture of their finances, and your accountant can forecast just how much impact different kinds or amounts of financing can have on your business’s future performance.

Using an Accountant to Prepare Your Business Loan Application

So, you’ve determined which loan program you’d like to apply for. And you’ve figured out how much you will seek. Now, it’s time to put your application together.

Sounds easy enough in theory, but loan applications are often a cumbersome process. Banks and credit unions want certain pieces of information in a certain type of package, and if you don’t provide exactly what they want, your application won’t be accepted. Every application is different, but there are typically 15 pieces of documentation that lenders look for.

A CPA can help you gather supporting documentation and send it in a proper format – increasing the chances of a fast decision. The alternative is a long back-and-forth that leaves your business in limbo for weeks – or even months. With the economic landscape changing quickly and program funding getting exhausted quickly, you simply can’t afford to wait around.

Certified Public Accountants Can Help You Manage Your Loan Proceeds

After you receive approval and the funds are deposited in your bank account, the right accountant will not consider their job to be complete. A Certified Public Accountant (CPA) can help you manage your loan proceeds, keeping you compliant with loan or program requirements, and ensuring your use of the funding is efficient from a tax standpoint. CPAs also provide business owners a sounding board for ideas about how to manage their cash flow day-to-day.

PPP borrowers, for example, need to abide by a list of requirements in order to qualify for loan forgiveness down the road. A good accountant will handle your bookkeeping or at least analyze it to tell you where your business expenses may not be in compliance with the program requirements, or how to properly convey these expenses to the lender when it is time to apply for forgiveness. Paying close attention to these factors will make it easier to prove how you used your funds when the time comes. And this doesn’t just apply to forgivable loans, either. Allocating expenses correctly is often a requirement of many kinds of loan programs, if you want to avoid having your loan called in early. A CPA can help you stay on track.

You don’t want to overlook the potential tax liability that comes with a new loan – there could be implications to your quarterly estimated taxes. An accountant can not only help you estimate your taxes but they can also assist you with budgeting to ensure that you don’t struggle to make your payment to the IRS come tax season.

Moreover, the right accountant can double as a consultant, leveraging their experience to advise you on how to better manage your funds for business purposes. Should you hire an independent contractor or a full-time employee? What pricing strategy should you use on your new product or service? Should you open a new business credit card? These are the types of questions that an accountant can offer their input on.

The Bottom Line

A CPA or qualified accountant can do a lot more than maintain your financial records and file your tax returns. They can essentially act as a partner in the business financing process from A to Z.

Finding the right accountant is key though. The best option is to ask for a referral from a trusted partner or colleague. If that’s not an option, you can try to find one online – but make sure you do your due diligence.

Having a good accountant can make a world of difference for your business, especially if you don’t have a great deal of financial acumen or previous business experience. Accountants are trained to assess and analyze businesses through their financial statements, and they can help give you a clear picture of the short-term and long-term health of your business. As such, if you are a small business owner, we highly recommend that you consider consulting a CPA and learning more about how they feel they can help your business specifically.

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